The one-step-ahead forecast of the next exchange rate change is given by
Et
(
st+1−st
)
while the one-step-ahead forecast for the subsequent exchange rate change is given by Et ( st+2−st+1 ) = κcEct(st+1−st) (49) = (κc)2(st−st−1). In general, we have Et ( st+n−st+n−1 ) = κcEct(st+n−1 −st+n−2) (50) = (κc)n(st−st−1). (51)
For forecasting the future exchange rate st+n chartists have to forecast the exchange rate changes as we have done before and then to calculate
Ectst+n = st+Ect[st+1−st] +Ect[st+2−st+1] +...+Ect[st+n−st+n−1(52)] = st+κc(st−st−1) + (κc)2(st−st−1) +...+ (κ c)n(st−st −1) = st+&κc + (κc)2+...+ (κc)n'(st−st −1) = st+κc&(κc)0+ (κc)1 +...+ (κc)n−1'(st−st −1)
By applying the formula for the geometric series we get
Ectst+n =st+κc·
(1−κc)n
References
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(
List of other working papers:2006
1. Roman Kozhan, Multiple Priors and No-Transaction Region, WP06-24
2. Martin Ellison, Lucio Sarno and Jouko Vilmunen, Caution and Activism? Monetary Policy Strategies in an Open Economy, WP06-23
3. Matteo Marsili and Giacomo Raffaelli, Risk bubbles and market instability, WP06-22
4. Mark Salmon and Christoph Schleicher, Pricing Multivariate Currency Options with Copulas, WP06-21
5. Thomas Lux and Taisei Kaizoji, Forecasting Volatility and Volume in the Tokyo Stock Market: Long Memory, Fractality and Regime Switching, WP06-20
6. Thomas Lux, The Markov-Switching Multifractal Model of Asset Returns: GMM Estimation
and Linear Forecasting of Volatility, WP06-19
7. Peter Heemeijer, Cars Hommes, Joep Sonnemans and Jan Tuinstra, Price Stability and
Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation, WP06-18
8. Giacomo Raffaelli and Matteo Marsili, Dynamic instability in a phenomenological model of correlated assets, WP06-17
9. Ginestra Bianconi and Matteo Marsili, Effects of degree correlations on the loop structure of scale free networks, WP06-16
10. Pietro Dindo and Jan Tuinstra, A Behavioral Model for Participation Games with Negative Feedback, WP06-15
11. Ceek Diks and Florian Wagener, A weak bifucation theory for discrete time stochastic dynamical systems, WP06-14
12. Markus Demary, Transaction Taxes, Traders’ Behavior and Exchange Rate Risks, WP06-13
13. Andrea De Martino and Matteo Marsili, Statistical mechanics of socio-economic systems with heterogeneous agents, WP06-12
14. William Brock, Cars Hommes and Florian Wagener, More hedging instruments may
destabilize markets, WP06-11
15. Ginwestra Bianconi and Roberto Mulet, On the flexibility of complex systems, WP06-10 16. Ginwestra Bianconi and Matteo Marsili, Effect of degree correlations on the loop structure of
scale-free networks, WP06-09
17. Ginwestra Bianconi, Tobias Galla and Matteo Marsili, Effects of Tobin Taxes in Minority Game Markets, WP06-08
18. Ginwestra Bianconi, Andrea De Martino, Felipe Ferreira and Matteo Marsili, Multi-asset minority games, WP06-07
19. Ba Chu, John Knight and Stephen Satchell, Optimal Investment and Asymmetric Risk for a
Large Portfolio: A Large Deviations Approach, WP06-06
20. Ba Chu and Soosung Hwang, The Asymptotic Properties of AR(1) Process with the
Occasionally Changing AR Coefficient, WP06-05
21. Ba Chu and Soosung Hwang, An Asymptotics of Stationary and Nonstationary AR(1)
Processes with Multiple Structural Breaks in Mean, WP06-04
22. Ba Chu, Optimal Long Term Investment in a Jump Diffusion Setting: A Large Deviation
Approach, WP06-03
23. Mikhail Anufriev and Gulio Bottazzi, Price and Wealth Dynamics in a Speculative Market with Generic Procedurally Rational Traders, WP06-02
24. Simonae Alfarano, Thomas Lux and Florian Wagner, Empirical Validation of Stochastic Models of Interacting Agents: A “Maximally Skewed” Noise Trader Model?, WP06-01 2005
1. Shaun Bond and Soosung Hwang, Smoothing, Nonsynchronous Appraisal and Cross-
Foreign Exchange Distributions with an Application to the Sterling Exchange Rate Index (Revised), WP05-14
5. Lucio Sarno, Daniel Thornton and Giorgio Valente, The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields, WP05-13
6. Lucio Sarno, Ashoka Mody and Mark Taylor, A Cross-Country Financial Accelorator: Evidence from North America and Europe, WP05-12
7. Lucio Sarno, Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?, WP05-11
8. James Hodder and Jens Carsten Jackwerth, Incentive Contracts and Hedge Fund Management, WP05-10
9. James Hodder and Jens Carsten Jackwerth, Employee Stock Options: Much More Valuable Than You Thought, WP05-09
10.Gordon Gemmill, Soosung Hwang and Mark Salmon, Performance Measurement with Loss Aversion, WP05-08
11.George Constantinides, Jens Carsten Jackwerth and Stylianos Perrakis, Mispricing of S&P 500 Index Options, WP05-07
12.Elisa Luciano and Wim Schoutens, A Multivariate Jump-Driven Financial Asset Model, WP05- 06
13.Cees Diks and Florian Wagener, Equivalence and bifurcations of finite order stochastic processes, WP05-05
14.Devraj Basu and Alexander Stremme, CAY Revisited: Can Optimal Scaling Resurrect the (C)CAPM?, WP05-04
15.Ginwestra Bianconi and Matteo Marsili, Emergence of large cliques in random scale-free networks, WP05-03
16.Simone Alfarano, Thomas Lux and Friedrich Wagner, Time-Variation of Higher Moments in a Financial Market with Heterogeneous Agents: An Analytical Approach, WP05-02
17.Abhay Abhayankar, Devraj Basu and Alexander Stremme, Portfolio Efficiency and Discount Factor Bounds with Conditioning Information: A Unified Approach, WP05-01
2004
1. Xiaohong Chen, Yanqin Fan and Andrew Patton, Simple Tests for Models of Dependence Between Multiple Financial Time Series, with Applications to U.S. Equity Returns and Exchange Rates, WP04-19
2. Valentina Corradi and Walter Distaso, Testing for One-Factor Models versus Stochastic Volatility Models, WP04-18
3. Valentina Corradi and Walter Distaso, Estimating and Testing Sochastic Volatility Models using Realized Measures, WP04-17
4. Valentina Corradi and Norman Swanson, Predictive Density Accuracy Tests, WP04-16 5. Roel Oomen, Properties of Bias Corrected Realized Variance Under Alternative Sampling
Schemes, WP04-15
6. Roel Oomen, Properties of Realized Variance for a Pure Jump Process: Calendar Time Sampling versus Business Time Sampling, WP04-14
7. Richard Clarida, Lucio Sarno, Mark Taylor and Giorgio Valente, The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates, WP04-13
8. Lucio Sarno, Daniel Thornton and Giorgio Valente, Federal Funds Rate Prediction, WP04-12 9. Lucio Sarno and Giorgio Valente, Modeling and Forecasting Stock Returns: Exploiting the
Futures Market, Regime Shifts and International Spillovers, WP04-11
10.Lucio Sarno and Giorgio Valente, Empirical Exchange Rate Models and Currency Risk: Some Evidence from Density Forecasts, WP04-10
11.Ilias Tsiakas, Periodic Stochastic Volatility and Fat Tails, WP04-09
12.Ilias Tsiakas, Is Seasonal Heteroscedasticity Real? An International Perspective, WP04-08 13.Damin Challet, Andrea De Martino, Matteo Marsili and Isaac Castillo, Minority games with
finite score memory, WP04-07
14.Basel Awartani, Valentina Corradi and Walter Distaso, Testing and Modelling Market Microstructure Effects with an Application to the Dow Jones Industrial Average, WP04-06
17.Alessio Sancetta, Decoupling and Convergence to Independence with Applications to Functional Limit Theorems, WP04-03
18.Alessio Sancetta, Copula Based Monte Carlo Integration in Financial Problems, WP04-02 19.Abhay Abhayankar, Lucio Sarno and Giorgio Valente, Exchange Rates and Fundamentals:
Evidence on the Economic Value of Predictability, WP04-01 2002
1. Paolo Zaffaroni, Gaussian inference on Certain Long-Range Dependent Volatility Models, WP02-12
2. Paolo Zaffaroni, Aggregation and Memory of Models of Changing Volatility, WP02-11
3. Jerry Coakley, Ana-Maria Fuertes and Andrew Wood, Reinterpreting the Real Exchange Rate - Yield Diffential Nexus, WP02-10
4. Gordon Gemmill and Dylan Thomas , Noise Training, Costly Arbitrage and Asset Prices: evidence from closed-end funds, WP02-09
5. Gordon Gemmill, Testing Merton's Model for Credit Spreads on Zero-Coupon Bonds, WP02- 08
6. George Christodoulakis and Steve Satchell, On th Evolution of Global Style Factors in the MSCI Universe of Assets, WP02-07
7. George Christodoulakis, Sharp Style Analysis in the MSCI Sector Portfolios: A Monte Caro Integration Approach, WP02-06
8. George Christodoulakis, Generating Composite Volatility Forecasts with Random Factor Betas, WP02-05
9. Claudia Riveiro and Nick Webber, Valuing Path Dependent Options in the Variance-Gamma Model by Monte Carlo with a Gamma Bridge, WP02-04
10.Christian Pedersen and Soosung Hwang, On Empirical Risk Measurement with Asymmetric Returns Data, WP02-03
11.Roy Batchelor and Ismail Orgakcioglu, Event-related GARCH: the impact of stock dividends in Turkey, WP02-02
12.George Albanis and Roy Batchelor, Combining Heterogeneous Classifiers for Stock Selection, WP02-01
2001
1. Soosung Hwang and Steve Satchell , GARCH Model with Cross-sectional Volatility; GARCHX Models, WP01-16
2. Soosung Hwang and Steve Satchell, Tracking Error: Ex-Ante versus Ex-Post Measures, WP01-15
3. Soosung Hwang and Steve Satchell, The Asset Allocation Decision in a Loss Aversion World, WP01-14
4. Soosung Hwang and Mark Salmon, An Analysis of Performance Measures Using Copulae, WP01-13
5. Soosung Hwang and Mark Salmon, A New Measure of Herding and Empirical Evidence, WP01-12
6. Richard Lewin and Steve Satchell, The Derivation of New Model of Equity Duration, WP01- 11
7. Massimiliano Marcellino and Mark Salmon, Robust Decision Theory and the Lucas Critique, WP01-10
8. Jerry Coakley, Ana-Maria Fuertes and Maria-Teresa Perez, Numerical Issues in Threshold Autoregressive Modelling of Time Series, WP01-09
9. Jerry Coakley, Ana-Maria Fuertes and Ron Smith, Small Sample Properties of Panel Time- series Estimators with I(1) Errors, WP01-08
10.Jerry Coakley and Ana-Maria Fuertes, The Felsdtein-Horioka Puzzle is Not as Bad as You Think, WP01-07
11.Jerry Coakley and Ana-Maria Fuertes, Rethinking the Forward Premium Puzzle in a Non- linear Framework, WP01-06
12.George Christodoulakis, Co-Volatility and Correlation Clustering: A Multivariate Correlated ARCH Framework, WP01-05
15.Eric Bouyé, Multivariate Extremes at Work for Portfolio Risk Measurement, WP01-02 16.Erick Bouyé, Vado Durrleman, Ashkan Nikeghbali, Gael Riboulet and Thierry Roncalli,
Copulas: an Open Field for Risk Management, WP01-01
2000
1. Soosung Hwang and Steve Satchell , Valuing Information Using Utility Functions, WP00-06
2. Soosung Hwang, Properties of Cross-sectional Volatility, WP00-05
3. Soosung Hwang and Steve Satchell, Calculating the Miss-specification in Beta from Using a
Proxy for the Market Portfolio, WP00-04
4. Laun Middleton and Stephen Satchell, Deriving the APT when the Number of Factors is
Unknown, WP00-03
5. George A. Christodoulakis and Steve Satchell, Evolving Systems of Financial Returns: Auto-
Regressive Conditional Beta, WP00-02
6. Christian S. Pedersen and Stephen Satchell, Evaluating the Performance of Nearest
Neighbour Algorithms when Forecasting US Industry Returns, WP00-01 1999
1. Yin-Wong Cheung, Menzie Chinn and Ian Marsh, How do UK-Based Foreign Exchange
Dealers Think Their Market Operates?, WP99-21
2. Soosung Hwang, John Knight and Stephen Satchell, Forecasting Volatility using LINEX Loss
Functions, WP99-20
3. Soosung Hwang and Steve Satchell, Improved Testing for the Efficiency of Asset Pricing
Theories in Linear Factor Models, WP99-19
4. Soosung Hwang and Stephen Satchell, The Disappearance of Style in the US Equity Market,
WP99-18
5. Soosung Hwang and Stephen Satchell, Modelling Emerging Market Risk Premia Using Higher
Moments, WP99-17
6. Soosung Hwang and Stephen Satchell, Market Risk and the Concept of Fundamental
Volatility: Measuring Volatility Across Asset and Derivative Markets and Testing for the Impact of Derivatives Markets on Financial Markets, WP99-16
7. Soosung Hwang, The Effects of Systematic Sampling and Temporal Aggregation on Discrete
Time Long Memory Processes and their Finite Sample Properties, WP99-15
8. Ronald MacDonald and Ian Marsh, Currency Spillovers and Tri-Polarity: a Simultaneous
Model of the US Dollar, German Mark and Japanese Yen, WP99-14
9. Robert Hillman, Forecasting Inflation with a Non-linear Output Gap Model, WP99-13
10.Robert Hillman and Mark Salmon , From Market Micro-structure to Macro Fundamentals: is
there Predictability in the Dollar-Deutsche Mark Exchange Rate?, WP99-12
11.Renzo Avesani, Giampiero Gallo and Mark Salmon, On the Evolution of Credibility and
Flexible Exchange Rate Target Zones, WP99-11
12.Paul Marriott and Mark Salmon, An Introduction to Differential Geometry in Econometrics, WP99-10
13.Mark Dixon, Anthony Ledford and Paul Marriott, Finite Sample Inference for Extreme Value
Distributions, WP99-09
14.Ian Marsh and David Power, A Panel-Based Investigation into the Relationship Between
Stock Prices and Dividends, WP99-08
15.Ian Marsh, An Analysis of the Performance of European Foreign Exchange Forecasters,
WP99-07
16.Frank Critchley, Paul Marriott and Mark Salmon, An Elementary Account of Amari's Expected
Geometry, WP99-06
17.Demos Tambakis and Anne-Sophie Van Royen, Bootstrap Predictability of Daily Exchange
Rates in ARMA Models, WP99-05
18.Christopher Neely and Paul Weller, Technical Analysis and Central Bank Intervention, WP99-
04
19.Christopher Neely and Paul Weller, Predictability in International Asset Returns: A Re- examination, WP99-03
Methods to Choose Style Factors in Global Stock Return Models, WP99-01
1998
1. Soosung Hwang and Stephen Satchell, Implied Volatility Forecasting: A Compaison of Different Procedures Including Fractionally Integrated Models with Applications to UK Equity Options, WP98-05
2. Roy Batchelor and David Peel, Rationality Testing under Asymmetric Loss, WP98-04 3. Roy Batchelor, Forecasting T-Bill Yields: Accuracy versus Profitability, WP98-03
4. Adam Kurpiel and Thierry Roncalli , Option Hedging with Stochastic Volatility, WP98-02
5. Adam Kurpiel and Thierry Roncalli, Hopscotch Methods for Two State Financial Models, WP98-01